Microsoft word - econ loss & designliability dco 2nd draft 24th sep 2006.doc

Developments in the Law of Economic Loss and
Liability under Design & Build Situations
ORGANISED BY
Society of Construction Law (Singapore)
15th – 17th October 2006,
Grand Copthorne Waterfront Hotel, Singapore
by COLIN Y.C. ONG1
General Introduction to the Law of Economic Loss
The current position depicting the law of economic loss even among Commonwealth countries is not a simple affair. It has been aptly described by Lord Steyn that liability for negligently caused economic loss is "the most controversial area of our law of tort” and has also been described as “one of the most confused and confusing areas in the law of tort in general”1. It is accorded different treatment in different countries. There have been a series of important case law developments taking place under English Common law over the last decade which has restated the position of how the principles underlying claims for economic loss in tort and the extent of claims for professional negligence should be treated by the Courts. Although English Courts have generally taken a more restrictive stance towards allowing for the recovery of economic loss, judicial decisions from other commonwealth countries like Australia2, Canada3, New Zealand4 and Singapore5 appear to have taken a different position are generally in favour of recovery on economic loss. Countries like Malaysia6 appear to have continued to apply the 1 See Foreword of Lord Steyn in Bernstein, Economic Loss (2nd ed, 1998) and See also Phang, Saw and Chan, “Of Precedent, Theory and Practice – The Case for A Return to Anns”, Singapore Journal of Legal Studies (July 2006) at page 1. 2 Burnie v General Jones (1994) 179 CLR 520; Bryan v Maloney (1995) 182 CLR 609 and Perre & Ors v Apand Pty Ltd (1999) 164 A.L.R. 606. See also Woolcock Street v CDG Pty Ltd (2004) 216 CLR 515 3 Cooper v Hobart (2001) 206 DLR (4th) 193. 4 South Pacific Manufacturing v New Zealand Security Consultants Ltd [1992] 2 NZLR 282 and Invercargill City Council v Hamlin [1996] AC 624. 5 RSP Architects & Engineers v Ocean Front Pte Ltd [1996] 1 SLR 113. and Man B & W Diesel SE Asia Pte Ltd & Anor v PT Bumi International Tankers [2004] 2 SLR 300 6 Majlis Perbandaran Ampang Jaya v. Steven Phoa Cheng Loon & Ors [2006] 2 MLJ 389 and Arab-Malaysian Finance Bhd v Steven Phoa Cheng Loon [2003] 1 MLJ 567 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
concepts of English law as they have oscillated between the swing in positions and culminating in Murphy v. Brentwood7. However, at the most basic and esoteric level, the basic cornerstone of the current approaches to economic loss in England, Australia, Canada, Brunei, Malaysia and Singapore, must start from the well known case Donoghue v Stevenson8, where Lord Atkins first stated the famous question of "Who, then, in law is my neighbour? . persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question9." This article aims to focus on the historical developments of English law in pure economic loss and design liability as well as the most recent decision of the Federal Court of Malaysia in the case of Majlis Perbandaran Ampang Jaya v. Steven Phoa10. It is not easy to give a definition to the term Economic loss. One could attempt to describe it as a purely monetary loss that is not connected with, nor a loss that flows from direct damage to a person or a person’s property11. The principle of English Common law establishing liability for pure economic loss was first established in the landmark decision of the House of Lords in Hedley Byrne v. Heller12. Lord Reid (at 486) had stated that the duty of care would arise "where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him". Lord Morris in the same case, held (at 502) that "it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise". English law then evolved and developed in the area of economic loss into several different lines until a major change took place in 1991 with the landmark decision of Henderson v. Merrett Syndicates Ltd13. 7 Murphy v. Brentwood District Council [1991] 1 A.C. 398. See also the House of Lords decisions of D. & F. Estates v. Church Commissioners [1989] A.C. 177 and Department of Environment v. Thomas Bates [1991] 1 A.C. 499 8 Donoghue v Stevenson [1932] AC 562 9 Supra Footnote 8 at page 580. 10 Majlis Perbandaran Ampang Jaya v. Steven Phoa Cheng Loon & Ors [2006] 2 MLJ 389 11 Keating on Building Contracts, 6th Edition 2001at Para 7.18, describes economic loss as “monetary loss and pure economic loss is monetary loss unrelated to physical injury to person or "other" property.” 12 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 13 Henderson v. Merrett Syndicates Ltd [1995] 2 A.C. 145 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
Before then, the House of Lords in Murphy v. Brentwood District Council14 unanimously departed from the old House of Lords decision of Anns v. Merton London Borough Council15 and all decisions which adopted the position in Anns, the position under English law continues to develop especially in the area of building law. Lord Keith in Murphy (at 466) held that: "If the plaintiffs (in Pirelli) had happened to discover the defect before any damage had occurred there would seem to be no good reason for holding that they would not have had a cause of action in tort at that stage without having to wait until some damage had occurred. They would have suffered economic loss through having a defective chimney upon which they (were) required to expend money for the purpose of removing the defect. It would seem that in a case such as Pirelli where the tortious liability arose out of a contractual relationship with professional people, the duty extended to take reasonable care not to cause economic loss to the client by the advice given". The problem with the position under Murphy v. Brentwood was that it made economic loss not recoverable unless Hedley Byrne v. Heller principles applied and a "special relationship" can be established. This made it a very difficult obstacle to overcome as the contractual structure between parties would tend to rule this special relationship out. Development of modern English Legal position on Economic Loss
Henderson v. Merrett Syndicates Ltd16 was the first major decision to have really completely restated the law in the area of economic loss. Lord Goff stated the general principles of law laid down in Hedley Byrne v. Heller17 and held that (at 181): “…if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows from the negligent performance of those services. It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further enquiry whether it is "fair, just and reasonable" to impose liability for economic loss.” As such the modern English position on the law of economic loss has restated the law as follows: as a starting point, there must be an assumed responsibility by the person providing services to the claimant and there was some form of reliance by the claimant18. As long as these 2 factors could be established, it would be 14 Murphy v. Brentwood District Council [1991] 1 A.C. 398. 15Anns v. Merton London Borough Council [1978] A.C. 728 16Henderson v. Merrett Syndicates Ltd [1995] 2 A.C. 145 17 Hedley Byrne v. Heller [1964] A.C. 465 18Lord Steyn made it clear in Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577 at p 582, that the assumption did not have to be a voluntary assumption with a subjective intention: "An objective test 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
unnecessary to prove whether it was "fair, just and reasonable" to impose liability19. The Henderson decision was also important from the perspective that the court allowed concurrent liability in contract and tort to be accepted provided that the tortious liability was not inconsistent with the contractual liability20. Lord Browne-Wilkinson in White v. Jones21 adopted this new principle laid down by Lord Goff and made it clear that the duty of care in fact arises by reason of an assumption of responsibility for the job in hand and not by way of an assumption of responsibility of legal liability. Lord Browne-Wilkinson stated that: ". the assumption of responsibility referred to is the defendants' assumption of responsibility for the task not the assumption of legal liability. Even in cases of ad hoc relationships, it is the undertaking to answer the question posed which creates the relationship. If the responsibility for the task is assumed by the defendant he thereby creates a special relationship between himself and the plaintiff in relation to which the law (not the defendant) attaches a duty to carry out carefully the task so assumed." Lord Browne-Wilkinson then held and summed up the modern position of the law on economic loss to be as follows: "The law of England does not impose any general duty of care to avoid negligent misstatements or to avoid causing pure economic loss even if the economic damage to the plantiff was foreseeable. However, such a duty will arise if there is a special relationship between the parties. Although the categories of cases in which such a special relationship can be held to exist are not closed, as yet only two categories have been identified, namely (1) where there is a fiduciary relationship and (2) where the defendant has voluntarily answered a question or tenders skilled advice or services in circumstances where he knows or ought to know that an identified plaintiff will rely on his answers or advice. In both these categories the special relationship is created by the defendant voluntarily assuming to act in the matter by involving himself in the plaintiff's affairs or by choosing to speak." Although White v. Jones concerned the situation of whether a solicitor owed a duty of care to intended beneficiaries under a will and not a building case, it nevertheless restated the principle of law that a contractor who is negligent in his build or design and such negligence causes damage to property which is purely economic in nature, such damages would be recoverable against the contractor if means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff." 19Supra footnote 16 at 145. 20In the earlier cases of Pilkington v. Wood [1953] Ch. 770 and Scott Lithgow v. Secretary of State for Defence (1989) 45 Building L.R. 1, the courts rejected concurrent liability on the basis that there would be danger of inconsistency. 21White v. Jones [1995] 2 A.C. 207 at 273 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
there has been some form of assumption of responsibility in respect of such construction services22. Generally contractors and professionals involved in the building industry will have their contractual obligations governed by contractual obligations expressed in the form of standard forms of building contracts23 or ad hoc building contracts. Lord Goff in Henderson v Merrett made it clear that “the common law is not antipathetic to concurrent liability” provided that the tortious liability was not inconsistent with the contractual liability. To determining whether or not concurrent liability would be inconsistent will require the courts to view the structure and the content of the contract. Further English Case Law Examples on Economic Loss
The Court of Appeal in Barclays Bank v. Fairclough24 continued to develop the law of economic loss. Sub Contractor specialists who cleaned an asbestos cement roof using power hosing without taking recommended precautions had caused economic loss to the main contractor. The Court held that "A skilled contractor undertaking maintenance work to a building assumes a responsibility which invites reliance no less than the financial or other professional adviser does in undertaking his work." In Phelps v Hillingdon25, the Court held that in a teacher-student relationship, a teacher may be placed under a duty of care not to cause pure economic loss by teaching students the wrong syllabus. In Niru Battery v. Milestone Trading26, an inspection company, which was part of a sale and purchase agreement between seller and purchaser to inspect and certify goods, was sued for economic loss by the purchaser with whom it had no contract. Mr Justice Moore-Bick held that whilst inspection companies receive instructions from the seller, such companies would be aware that their certificate was likely to be presented to the purchaser whom it should have had in mind as the person most likely to be affected by any error. The nature of the inspection company's job made it "inherent" that it had assumed responsibility to the buyer for what was to be stated in its certificate. As such, it owed a duty to exercise reasonable care to 22 For detailed reading into the development of the law in this period, see, Wallace, “Anns Beyond Repair”, (1991) 107 LQR 228 and Stapleton, “Duty of Care and Economic Loss - a Wider Agenda”, (1991) 107 LQR 249. 23 Eg: FIDIC Form of contracts in the international context, PAM Form of Contracts in Malaysia and the SIA Form of Contracts in Singapore. 24 Barclays Bank plc v. Fairclough Building Ltd [1995] 44 Con.L.R. 35 25 Phelps v Hillingdon London Borough Council [2001] 2 AC 619 at p 667 26 Niru Battery Manufacturing Co v Milestone Trading Ltd [2002] 2 All ER 705 at p 723 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
ensure the accuracy of the certificate on those matters on which it had been instructed to report27. The House of Lords in Spring v Guardian Assurance28, held that persons who write references for former employees served an important function and that these functions had to be properly discharged or liability would be imposed. As most of the affected persons by negligent references would be third parties, the law of contract would not provide an answer in most cases, and the only remedy against any defendant would have to lies in tort of negligence. However, in certain situations, not covered by the scope of this paper, third parties may be able to seek protection under the Contracts (Rights of Third Parties) Act 199929. Patent or Latent Damage?
It is generally accepted that there can always be a case for negligence, where it is proven that there has been a breach of a duty of care, for either personal injury or physical damage to other property other than the thing itself30. Immediate or Patent Damage to the building itself is deemed as pure economic loss, and will generally not be recoverable, unless the defect is latent31. However, if the nature of the relationship is such that a duty of care not to cause economic loss can be established, then this type of loss becomes recoverable. Where a party has assumed responsibility for which advice or service is relied upon, and the consequence of negligent performance is economic loss, then that loss is recoverable32. Modern construction law practice seems to favour allowing advice given or statements made by architects and building designers to become subject to the exception to the general rule against economic loss being irrecoverable. Such advice now cover even drawings and design plans made by such individuals. Architects and Building designers are now deemed to owe a duty of care to building owners to use reasonable skill and care not to cause economic loss in their design33 and build plans. 27 Supra footnote 23 at page p 725a 28 Spring v Guardian Assurance [1995] 2 AC 296 29 For general reading, see Andrews, “Strangers to Justice No Longer: The Reversal of the Privity Rule Under the Contracts (Rights of Third Parties) Act 1999” (2001) 60 CLJ 353 30 Murphy v. Brentwood District Council [1991] 1 A.C. 398 31 See, Court of Appeal ruling in Baxall Securities Ltd v Sheard Walshaw Partnership [2002] B.L.R. 100, 32 Hedley Byrne v Heller & Partners Ltd [1963] 2 AER 575 and Caparo Industries Plc v Dickman [1990] 1 All ER 568. 33 Storey v Charles Church Developments Ltd (1996) 12 Const. L.J. 206. In Singapore, See, RSP Architects Planners & Engineers (Raglan Squire & Partners FE) v Management Corp [1999] 2 S.L.R. 449. 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
Despite the benefit of the various decisions by the House of Lords on the subject
of economic loss in tort, when applied to construction projects, this subject is still
a very controversial one as can be seen from two English High Court judgments.
The two judgments of Samuel Payne v John Setchell Ltd34 and Tesco Stores Ltd v
Costain Construction Ltd35 were building cases that came to very different
conclusions on the position of the law. In each case, the court examined the law of
negligence, and had to consider when a designer or a builder in a building project
should be held liable for economic losses. However, the cases came to different
conclusions. The Court in Payne had to decide on whether there was liability to be
founded on an engineering firm which had advised on and prepared drawings for
foundations that later failed. The Court found that the firm was not liable for the
resulting loss, as that loss was deemed to be pure economic loss and therefore
could not be recovered. Judge Humphrey LLoyd Q.C. gave the judgment for the
court and held that:
“In my judgment Murphy and DOE v Bates establish that, as a matter of policy,
any person undertaking work or services in the course of a construction process
is ordinarily liable only for physical injury or for property damage other than to
the building itself but is not liable for other losses - ie economic loss. If any
liability for such economic loss is to arise it must be for other reasons, eg as a
result of advice or statements made upon which reliance is placed in
circumstances which create a relationship where there is in law to be an
assumption of the responsibility for loss - ie within the principle of Hedley Byrne
v Heller….In my judgment a designer is not liable in negligence to the client or to
a subsequent purchaser for the cost of putting right a flaw in the design that the
designer has produced that has not caused physical injury or damage, just as a
contractor is not liable36 ."
In short, the judgment in Payne simply means that a designer will not be found
liable to the building owner or any subsequent purchaser for costs of repairing any
design flaw that has not caused physical injury or damage, just as a contractor will
not liable. There is a presumption against any assumption of liability unless
otherwise proven.
The Court in Tesco Stores, came to a different conclusion. In this case, the Defendant, Costain was accused of negligent building and accused of failure to provide adequate fire prevention building within the store, as well as accused of negligence in carrying out its inspection of the store in assessing the adequacy of fire-prevention measures in place. The Court came to the conclusion that anyone “who undertakes by contract to perform a service for another upon terms, express 34 Payne v John Setchell Ltd [2002] B.L.R. 489 35 Tesco Stores Ltd v Costain Construction Ltd [2003] EWHC 1487. 36 Payne at page 508. 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
or implied, that the service will be performed with reasonable skill and care, owes a duty of care to like effect . which extends to not causing economic loss .". Judge Seymour QC referred to an applied settled principles of Henderson v Merrett to decide that a builder who undertook by contract to perform a service for another upon terms, express or implied, that the service would be performed with reasonable skill and care, owed a duty of care to like effect to the other parties to the contract that extended to not causing economic loss37. It is thus clear that there are difficult issues associated with the continued use of the “assumption of responsibility” concept as a basis of claiming pure economic loss38. Although this paper does not propose to focus onto non-Commonweath territory, it is useful to show the US law position in this difficult area of law. In Miller v United States Steel, Judge Posner held that "It would be better to call it a 'commercial loss' not only because personal injuries and especially property losses are economic losses too they destroy values which can be and are monetarised - but also and more important, because tort law is a superfluous and inapt tool for resolving purely commercial disputes. We have a body of law designed for such disputes. It is called contract law39." DESIGN AND BUILD LIABILITY
The term design and build contract is a broad description of a situation wherein a contractor or designer has agreed to cover an entire package contracting for all inclusive building services to develop and construct a building. In a design and build contract, the contractor is the main person in control and has equally large responsibilities in that it is responsible for independent consultants that are employed to assist it40. The Design & Build Contractor must also take responsibility for any mistakes caused by any failure or miscommunications between the consultants and himself. It also bears the responsibility for ensuring that the materials that are used in the building are fit for the purpose41 and that the design of the building project is adequate for the purposes42. It is worth quoting from the judgment of Lord 37 Other cases that refused to adopt the Payne approach include Mirant Asia-Pacific Construction v. Ove Arup & Partners International Ltd [2004] EWHC 1750. 38 See Customs and Excise Commissioners v Barclays Bank Plc [2005] 1 Lloyd's Rep 165 which is currently on appeal to the House of Lords. 39 Miller v United States Steel Corporation (1990) 902 F 2d 573 at 574 40 Eg., See Bolam v. Friern Hospital Management Committee [1957] 2 All ER 118 and Hawkins v. Chrysler (1986) 38 B.L.R. 36]. 41 See Greaves and Co. (Contractors) Limited v. Baynham [1975] 2 Lloyd's Rep. 325; Viking Grain Storage v. T.H. White Installations (1985) 33 B.L.R. 103 and I.B.A. v. EMI Electronics (1980) 14 B LR. 1. 42 Basildon District Council v. J. E. Lesser (Properties) Limited [1985] Q.B. 839 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
Denning (sitting in the English Court of Appeal) in Greaves v Baynham, wherein he held: “Now, as between the building owners and the Contractors, it is plain that the owners made known to the Contractors the purpose for which the building was required, so as to show that they relied on the Contractor’s skill and judgment. It was, therefore, the duty of the Contractors to see that the finished work was reasonably fit for the purpose for which they knew it was required. It was not merely an obligation to use reasonable care. The Contractor was obliged to ensure that the finished work was reasonably fit for the purpose.” However, before the design & build contractor may be held responsible for these elements, the employer must prove that he had relied on the skill and judgment of the contractor43. Generally in a Design & Build contract, the terms and conditions of the contract itself usually spells out the level of responsibility that is to be undertaken by the contractor or the design team in respect of the design work. However, where there are no express contractual terms on imposition of responsibility for design work, the courts will seek to imply such an obligation in the event that of a dispute between the parties. The liability of a professional building designer to his employer in respect of a design in a building contract which later is proven to be defective, will usually be ascertained by the standard of reasonable skill and care44. It has been judicially suggested in several cases that in certain situations that the liability of a designer may be higher than that of reasonable skill and care and there is an imposition of a fitness for purpose warranty on professional designers45. The importance of the distinction between the use of reasonable skill and care and an obligation as to fitness for purpose is that in the former case negligence has to be shown “whereas in the latter case there is an absolute obligation which is independent of negligence: negligence does not have to be proved where there is an obligation as to fitness for purpose”46. There is an implied obligation on the design & build contractor to carry out his work with all proper skill and care. This is an implied obligation that is imposed on the contractor throughout the stages of construction works until completion47. 43 Lynch v. Thorne [1956] 1 All E.R. 744. 44 George Hawkins v. Chrysler (U.K.) Limited and Another (1986) 38 B.L.R. 36 at 55 where the Court held that a designer may be subjected to a fitness for purpose standard "if his contract extends not merely to the design of an article, but to its supply or manufacture". 45 Greaves (Contractors) Limited v. Baynham Meikle and Partners [1975] 3 All E.R. 99; Independent Broadcasting Authority v. EMI Electronics Limited (1980) 14 Build.L.R. 1; and Norta Wallpapers (Ireland) Limited v. John Sisk and Sons (Dublin) Limited (1977) 14 Build.L.R. 49. 46 See, David Comes, “Design Liability in the Construction Industry” (Collins 1985) at page 50. 47Young and Marten Limited v. McManus Childs Limited [1969] 1 A.C. 454. 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
For example, for site liability, a Design & Build Contractor can be made liable expressly by the terms of the contract or may be under a duty of care to satisfy itself of ground conditions by making the required and to carry out its own necessary investigations. However, the contractor must be in a position to be able to physically carry out its investigations. It must not be placed in a situation where it was either impossible for the contractor to carry out its site inspections or where it was placed in a position which made it economically unviable for it to have been able to carry out such extensive site investigations48.
Case Law Examples on Liability arising from Design & Build situations
4.6.
In RMC Roadstone Products Ltd v. Jester49, a company which had engaged an independent contractor to do some work including the removal of some asbestos-cement sheets from the roof of a disused factory for to be re-used. The system of work adopted by the independent contractor was found to be unsafe and caused the death of one of its workers. Smith J. held that he was “.unable to accept that the mere capacity or opportunity to exercise control is enough to bring the activity within the ambit of the employer's conduct of his undertaking. Before he can say that an activity is within his conduct of his undertaking, the employer must, in my judgment, either exercise some actual control over it or be under a duty to do so." In D&F Estates v. Church Commissioners50 the House of Lords had to deal with a latent defects claim in negligence against a main contractor arising out of faulty workmanship by its plastering sub-contractor. This claim was rejected unanimously by the House of Lords. Lord Bridge explained the position of the independent contractor (at page 208) and held that: "It is trite law that the employer of an independent contractor is, in general, not liable for the negligence or other torts committed by the contractor in the course of the execution of the work. To this general rule there are certain well-established exceptions or apparent exceptions . But it has rightly been said that 'the so-called exceptions are not true exceptions (at least so far as the theoretical nature of the employer's liability is concerned) for they are dependent upon a finding that the employer is himself in breach of some duty which he personally owes to the plaintiff ."' 48Morrison-Knudsen Int. Company Incorporated v. Commonwealth of Australia (1972) 13 Build L.R. 114. 49 RMC Roadstone Products Ltd v. Jester [1994] 4 All E.R. 1037 50 D&F Estates v. Church Commissioners [1989] A.C. 177 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
The Court of Appeal in Eckersley v. Binnie51 had to deal with a case relating to liability for risks to safety arising out of a construction project in which a number of visitors to a water pumping station were killed or seriously injured by an explosion of methane gas. The victims or their families brought tort claims against the consulting engineer, the contractor and the water authority client. All three defendants were found liable by the Court at first instance and all appealed to the Court of Appeal. The Court held that only the consulting engineer was liable. The contractor was let off as it was held that the contractor's duty to test for methane was only relevant to safety during the period of construction. Employer not always exempted
Having stated and laid down the case examples and dangers for contractors involved in design & build liability, one must also state that an employer is not always exempted from liability to third parties for damage caused by negligent design. An employer is not allowed to simply point fingers at the contractor or designers for design and build liability. The House of Lords in R. v. Associated Octel52 in a unanimous judgment delivered by Lord Hoffmann, held that "If an employer engages an independent contractor to do work which forms part of the conduct of the employer's undertaking, he must stipulate for whatever conditions are needed, to avoid those risks and are reasonably practicable. He cannot, having omitted to do so, say that he was not in a position to exercise any control." Malaysian Position on Pure Economic Loss
The most recent case on the law of economic loss in Malaysia was the recent Federal Court judgment of Majlis Perbandaran Ampang Jaya v. Steven Phoa53. This case formed part of a series of interconnected cases dealing with the Highland Towers saga which flowed from a catastrophic collapse of tower blocks of apartments on a hillside in Kuala Lumpur in 1993. After the collapse of Block 1, the local authority MPAJ had promised the respondents that a master drainage plan for the affected area on the hill slope behind Highland Towers would be formulated and implemented to ensure the stability of the adjacent Blocks 2 and 3. However, MPAJ failed to carry out the plan and were sued for pure economic loss in negligence and nuisance. An important part of the case also centred around issues of public policy and whether local Malaysian circumstances should allow such claims if such claims were considered fair, just and reasonable. The Malaysian Federal Court started its discussions on this area of the law with a sweeping statement and held that: 51 Eckersley v. Binnie [1988] 18 Con.L.R. 1 52 R. v. Associated Octel [1996] 1WLR 1543 at 1547 53 Majlis Perbandaran Ampang Jaya v. Steven Phoa Cheng Loon & Ors [2006] 2 MLJ 389 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
“All major Commonwealth jurisdictions recognize that pure economic loss is recoverable in negligence. Under English law, the general duty of care test enunciated in Caparo Industries Plc v Dickman [1990] 2 AC 605 is applicable to all negligence claims, including claims for pure economic loss. Pursuant to this test, three questions have to be addressed, namely, whether the damage suffered by the plaintiff is reasonably foreseeable; whether there is a relationship of proximity between the plaintiff and defendant; and whether it is fair and reasonable that the defendant should owe the plaintiff a duty of care. The English courts have adopted a dual approach in applying the Caparo test.” It then dissected the dual approach. The Federal Court the first category called the categorisation approach and stated that the English courts would determine if the plaintiffs claim falls into a recognized category of liability. It then described the second category as the “open-ended approach” stating that “.if the facts of a particular case do not come within a recognized category of liability, a court could go further to look at the facts closely to determine if a duty of care should nevertheless be owed by the defendant to the plaintiff54.” The Federal Court then discussed the relevant English authorities on the subject, focusing on Murphy v. Brentwood55. It then discussed the judgments of other common law countries which it viewed as having adopted the “open-ended approach56” which all agree that claims for pure economic loss in the law of negligence are not precluded and will depend on the facts of individual cases. The Federal Court held that “In Singapore too, the courts have recognized the open-ended approach. In RSP Architects Planners & Engineers (Reglan Squire & Partners FE) v Management Corporation Strata Title No 1075 [1999] 2 SLR 449, the Court of Appeal has held that whether a defendant owes the plaintiff a duty of care not to cause the particular type of loss depends on the circumstances and facts of that case. This view has been confirmed in the recent case of Man B & W Diesel SE Asia Pte Ltd & Anor v PT Bumi International Tankers and another appeal [2004] 2 SLR 300, at p 318 where the Court of Appeal also expresses the view that the principle in Donoughue v Stevenson [1932] AC 562 was still evolving and could offer redress for loss suffered by the plaintiff as a result of defendants acts and omissions in circumstances where a remedy for such losses would not otherwise exist 57.” The Malaysian Court then held that “Having had the benefit of reading the various authorities on this subject, I am more inclined to accept the positions taken by the courts in Australia and Singapore. In adopting the sentiments and 54 [2006] 2 MLJ 389, 406 at [15] 55 Murphy v. Brentwood District Council [1991] 1 A.C. 398. 56 Perre & Ors v Apand Pty Ltd (1999) 164 ALR 606; South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd [1992] 2 NZLR 282 57 [2006] 2 MLJ 389, 407 at [19] 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
observations expressed by the Singapore Court of Appeal in PT Bumi International Tankers, I would also endorse the view that caution should be exercised in extending the principle in Donoghue v Stevenson to new situations. Much would depend on the facts and circumstances of each case in determining the existence or otherwise of a duty of care 58.” The Federal Court upheld the decision of the Malaysian Court of Appeal on this ground of law and stated “The Court of Appeal in the instant case is correct in adopting the view expressed by Lord Oliver in Murphy v Brentwood that the critical question is not the nature of the damage itself, whether physical or pecuniary, but whether the scope of the duty of care in the circumstances of the case is such as to embrace damage of the kind which the plain-tiff claims to have sustained. The decision in Murphy involves, as I have mentioned earlier, the application of the Caparo test which takes into account the elements of foreseeability, proximity and the additional requirement of justice, fairness and reasonableness59.” The Federal Court went on to confirm that the position of Malaysian law on the law of pure economic loss claims resulting from nuisance claims was to be the same as the House of Lords decision of Hunter v Canary Wharf60 and held that “On the authority in Hunter v Canary Wharf Ltd, which I accept to be correct, it seems clear that pure economic loss is recoverable for any of the forms of nuisance recognized by law. Indeed, the fact that damages for diminution in value in land are recoverable in nuisance has been recognized by the Federal Court in Liew Choy Hung v. Shah Alam Properties Sdn Bhd [1997] 2 MLJ 30 61.” However, in spite of the logically reasoned propositions of law as stated above, the Federal Court then went on to consider the position and impact of the issue of public policy in allowing such claims for pure economic loss against a public authority62.” In the Court of Appeal Decision in Arab-Malaysian Finance Bhd v. Steven Phoa63, the Court of Appeal made it clear that Malaysian Courts are not entitled to use the concept of policy to award damages for pure economic loss. In doing so, the court overruled the earlier decisions of the High Courts in Dr Abdul Hamid Rashid v Jurusan Malaysian Consultants64 and Pilba Trading v South East Asia Insurance65. At the High Court stage in 1996, Justice James Foong (as he then was) had decided the Dr Abdul Hamid Abdul Rashid & Anor v Jurusan Malaysia Consultants and had allowed the claim for economic loss on a public policy basis 58 [2006] 2 MLJ 389, 407 at [20] 59 [2006] 2 MLJ 389, 407 at [21] 60 Hunter v Canary Wharf Ltd [1997] 2 WLR 684 61 [2006] 2 MLJ 389, 408 at [23] 62 [2006] 2 MLJ 389, 418 at [56] 63 Arab-Malaysian Finance Bhd v. Steven Phoa Cheng Loon [2003] 1 MLJ 567 64 Abdul Hamid Rashid v Jurusan Malaysian Consultants [1997] 3 MLJ 546 65 Pilba Trading & Agency v South East Asia Insurance Bhd & Anor [1998] 2 MLJ 53 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
as he was concerned that otherwise an entire group of subsequent purchases in Malaysia “would be left without relief against errant builders, architects, engineers and related personnel who are found to have erred 66.” However, this case was overruled by the Court of Appeal in the instant case as the Court of Appeal did not feel that it was correct to allow a claim for economic loss based on public policy. Unfortunately, it appears that the Federal Court decided to rely on the doctrine of public policy (in the opposite conclusion) in disallowing the claim for pure economic loss. The Court purported to rely on a statutory provision found in Section 3(1) of the Civil Law Act 1956. Section 3(1) of the Act provides that: “3(1) Save so far as other provision has been made or may hereafter be made by any written law in force in Malaysia, the court shall (a) in West Malaysia or any part thereof, apply the common law ofEngland and the rules of equity as administered in England on 7 April 1956; (b) in Sabah, apply the common law of England and the rules of equity, together with statutes of general application, as administered or in force in England on 1 December 1951; (c) in Sarawak, apply the common law of England and the rules of equity, together with statutes of general application, as administered or in force in England on 12 December 1949, subjecthowever to subsection (3)(ii): Provided always that the said common law, rules of equity and statutes of general application shall be applied so far only as the circumstances of the States of Malaysia and their respective inhabitants permit and subject to such qualifications as local circumstances render necessary.” The Federal Court stated that “Even if we accept that the question is not the nature of the damage itself, whether physical or percuniary, but whether the scope of the duty of care in the circumstances of the case is such as to embrace damage of the kind suffered by the plaintiffs, there is the additional factor to be considered, ie whether it is fair, just and reasonable to impose such a duty. This is where public policy and local circumstances come into consideration67.” 66 [2006] 2 MLJ 389, 421 at [69] 67 [2006] 2 MLJ 389, 423 at [78]. The Federal Court purported to rely on Caparo Industries plc v Dickman [1990] 1 All ER 568 (HL) at pp 573574, which held that “What emerges is that, is addition to the foreseeability of damage, necessary ingredients in any situation giving rise to a duty of care(whether)…the situation should be one in which the council considers it fair, just and reasonable that the law should impose a duty of a given scope on the party for the benefit of the other.” 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
7.2. The Federal Court then posed the following rhetorical question68 and answered itself: “…considering the public policy and local circumstances, is it fair, just and reasonable to impose a liability on MPAJ, a local authority, for pure economic loss to the plaintiffs for its failure (so far) to come up with and implement the promised drainage master plan or to stabilize the hill slop on Arab Malaysian Land to ensure that no accident of the kind that caused the collapse of Block 1 would occur to Blocks 2 and 3?.A local council is establish with a host of duties to perform, from providing and maintaining recreational areas and collecting garbage to providing public transport, homes for the squatters, temporary homes in case of disasters, natural or otherwise, and so on. Indeed, the list is endless….With limited resources and manpower local councils would have to have their priorities. In my view, the provision of basic necessities for the general public has priority over compensation for pure economic loss of some individuals who are clearly better off than the majority of the residents in the local council area. Indeed, the large sum required to pay for the economic loss, even if a local council has the means to pay, will certainly deplete whatever resources a local council has for the provision of basic services and infrastructure. Projects will stall. More claims for economic loss will follow. There may be situations where a local council, which may only be minimally negligent, may be held to be a joint tortfeasor with other tortfeasors, which may include irresponsible developers, contractors and professionals. The local council may go bust. Even if it does not, is it fair, just and reasonable that the taxpayers’ money be utilised to pay for the ‘debts’ of such people? In my view, the answer is ‘No…… I do not think that, in the present circumstances, on the facts and in the circumstances of this case, it is fair, just and reasonable to impose such a burden on MPAJ or other local councils in this country in similar situations69.” The Federal Court finally concluded the position of the law as follows: “While economic loss under limited situations may be allowed, Malaysian courts will have to consider the effects of s 3 of the Civil Law Act 1956 and, considering the ‘public policy’ and the ‘local circumstances’, whether it is fair, just and reasonable to allow it on the facts and in the circumstances of the case.” In effect, the judgment appears to state that under current Malaysian jurisprudence, the claim for pure economic loss is recoverable against private parties but not against Government bodies and councils. It has used the loose concept of public policy to draw an artificial line between the 2 groups of persons. This however has unfortunately caused a great deal of uncertainty in the law as to how, who and when this concept of public policy is applicable against. This final conclusion of an otherwise clear and powerful judgment appears to have added a further complication and dimension to the already difficult area of law. It has certainly made it harder for both professional builders and lawyers to properly 68 [2006] 2 MLJ 389, 423 [at 80 to 85] 69 [2006] 2 MLJ 389, 424 [86] 2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.
understand the risks involved in future building projects in Malaysia and the risks involved in negligently causing economic loss. 1. Panel Member of ASEAN Dispute Settlement Mechanism;
Arbitrator and Barrister of Essex Court Chambers and 3 Verulam Buildings,
London; Managing Partner, Dr Colin Ong Legal Services, Brunei Darussalam;
Adjunct Associate Professor, National University of Singapore; Visiting Fellow,
Queen Mary, University of London.
(All views expressed in this paper are strictly personal and are solely the private
views of the author only. E-mail: [email protected])
2006 Colin Yee Cheng Ong. These materials are subject to copyright. No part may be reproduced, adapted or communicatedwithout written consent of the copyright owner except as permitted under applicable copyright law.

Source: http://www.scl.org.sg/conf2006/resources/6_Colin%20Ong_paper.pdf